Institute For Economic Common Sense - Second Lesson

Proportional Representation

Clearly an absolute necesssity. Consider the following analogy:

10 friends are going out for dinner. They decide to pick the restaurant democratically. Here's how they vote:

• 4 want restaurant A (and hate B)
• 3 want restaurant B (and hate A)
• 2 want restaurant C (and hate A and B)
• 1 wants restaurant D (and hates A and B)

Under the awful British system of first-past-the-post, the friend group ends up going to restaurant A. The majority of diners hate that restaurant.

Under proportional representation, the largest of the minorities does not get to impose its will. They get together, rule out A and B as most unpopular and probably end up eating at C or D (or even find there's a restaurant E which everyone is more or less happy with). The point being that no one ends up somewhere they hate and everyone gets something they can tolerate.

Politically, it has been argued that proportional representation leads to governmental paralysis as coalitions find it difficult to agree long enough to build a programme for stuff like govering the country.

But why govern the country in a direction that most people don't want, simply because you're the largest minority? Wouldn't it be better to wait until you can find something that the majority of people can get behind, or at least don't have a strong objection to?

And what's wrong with paralysis anyway? Are there problems so desperately urgent that you need to fix them RIGHT NOW? And even if that is the case, why should that be an opportunity for you to make changes that most people don't want? If there's something bad going on, using the opportunity to get up to shady stuff doesn't say good things about you.

At time of crisis, a government of national unity is the best solution anyway, i.e. get as many differing voices as possible in the room and try to hammer out something that works for everyone. And at times not of crisis, what's the hurry to ram through legislation that most people find objectionable?

Consider the current (14 September 2020) British government.

Off they go, full of vim and bluster, ignoring conventions, threatening to break the law, ignoring dissenting voices, because they can. The majority of the population did not vote for them but they are the largest majority and they will go a-hunting wheresoever they please.

Under proportional representation, they would have been forced to find common ground if they wanted to get anything done. Yes, get all the voices in the room and try to bring the country along with them, as a whole.

With all due respect, that's not happening right now. Watch this space to find out how it ends...

Institute For Economic Common Sense - First Lesson

It is a truth universally acknowledged, that every single nation that wishes to be respected by economists, must be in want of continuous growth.

The dreaded GDP, gross demonic domestic product, must always be on the up because otherwise, ooh, there be dragons or something.

How does this work? Apparently, an ideal GDP annual growth rate is 2-3%. At 2%, over twenty years, that means the economy must become half as large again (i.e. every £1 in GDP becomes £1.49 to be exact). And over fifty years, we're looking at becoming two-and-a-half times bigger (every £1 becomes £2.69). If you think that's crazy, we need to be at £7.24 after a century.

One of the (many) problems with GDP is its horrific statistics cherry picking. Essentially, anything that is difficult to measure is ignored. Health, happiness, environment, waste - no thank you, we won't worry about any of that. And so we end up with these scenarios:

Scenario 1 (good for GDP):

• Boy visits grandmother.
• Grandmother gives him toy which she bought for him, made in a factory by badly paid people in uncomfortable conditions.
• Boy is polite and thanks grandmother effusively.
• Boy's mother collects boy, gives grandmother box of biscuits in thanks for childcare. Biscuits use cheap ingredients bad for environment (e.g. palm oil).
• Grandmother is polite and thanks daughter (boy's mother - keep up) effusively.
• Boy and daughter leave. Grandmother throws biscuits in the bin because she doesn't like them.
• Boy arrives home. Boy throws toy in the bin because it's not very nice.
• Next visit - grandmother has bought two toys because boy likes them so much.
• Next collection - daughter buys grandmother two boxes of biscuits because she likes them so much.
• Result - GROWTH! GDP is happy. More unwanted garbage in landfill, more pointless work done by workers in unpleasant conditions. More use of limited world resources - from ground to factory to shop to house to buried in the ground again - in a pointless cycle of waste.

Scenario 2 (bad for GDP):

• Boy visits grandmother.
• Boy climbs tree in grandmother's garden to pick tasty fruit that she can't reach.
• Grandmother teaches boy how to make a tasty pie from the tasty fruit.
• Daughter arrives to collect boy. They all enjoy some pie.
• No need for gifts - boy has obtained fruit for grandmother, grandmother has made pie for boy and daughter.
• Result - NO GROWTH! GDP has not increased, therefore this transaction has no merit and must be stopped. Also, no garbage in landfill, no pointless work done in unpleasant conditions. Instead - happiness and sharing has raised moods, but this cannot be measured so is worthless.

GDP was a tool to get a rough idea of how economies are getting on. It has mutated horrifically into a be-all-and-end-all (which can be abbreviated to bell-end, if you prefer) and has become a driver of what should happen instead of an approximation of what has happened. The ignored factors severely restrict its application to the real world.

And infinite growth is clearly ridiculous.

Discuss.

Sacrifices to the deities

Prehistory

A long, long time ago (or way way back, many centuries ago, depending on which songwriter you prefer), people used to kill - but not to eat the prey, nor to conquer their land, nor to exact vengeance.

This would be a sacrifice. Something has gone wrong and something needs to be killed to appease a deity. Or something hasn't gone wrong but might go wrong unless something is killed to appease a deity. (I realise I'm oversimplifying.)

Now, looking back on it, these quaint if uncomfortable practices seem ludicrous to us. Killing a sheep (or goat or great-uncle) isn't going to make a lot of difference to whether there's enough rainfall for the crops. We see that now. And we feel that we wouldn't get tangled up in that sort of practice again.

Nowadays

During these days of global financial slowdown due to global pandemic affecting, er, the globe, the British government has instigated a scheme for people to take a holiday from mortgage and loan repayments.

But holiday is a bit of a strange word. Imagine a holiday where, for every week off, you had to make up the five days over three weekends after you came back. Not really a holiday, is it? More a work-shift, except that it's grown a bit - those five days have become six and you're going to be seriously knackered when you stagger to the end of the fourth Friday since the first Monday with no weekends to break up the load.

Because the interest on the loan will continue to accrue over the payment holiday so, when you restart payments, they will be bigger. Over the lifetime of the loan, you will end up paying more interest.

Barbers have had three months of no income. Restaurants have had three months of no income. Gyms have had three months of no income. Airlines have had three months of... You get the idea.

But banks? They've just given you a bit more of a loan, at the usual rate, and they'll be wanting their money back, with interest (and interest on the interest). Why?

Short answer - because they can.

To continue my tendancy to oversimplify - when you or I successfully apply for a loan from a bank, the bank makes the money out of thin air (because the nation's central bank says they can), squirts it into your bank account and charges you interest for borrowing this newly created money, which they then get back over the loan period.

The bank has to 'borrow' this money from the nation's central bank, which it does at the so-called base-rate (in the UK today it is currently 0.1% - by contrast, the Nationwide's standard mortgage rate currently stands at 4.24%). So for every £100,000 which the Nationwide lends to a standard mortgage rate customer, every year they pay the Bank of England £100 in interest but gain £4,240. A profit of £4,140 per year.

I know they have to do so much admin to run the account, but I think they can probably use economy of scale to make sure the costs don't wipe out the profits.

Instead of a payment holiday/loan/postponement (call it what you like), there could have been a real payment holiday. The sort where your payment doesn't send you emails while you're on the beach and expect you to answer them immediately. The sort where everything just stops for three months. Nothing needs to be paid, no extra interest is charged, the end date of the loan skips three months down the road. It's as if, financially, those three months don't happen.

And if mortgages don't need to be paid, rents can be reduced accordingly. Because the barber, the restaurant owner, the gym company - they have no money coming in the door but the landlord needs to be paid. Why? Because the landlord has a mortgage/loan to worry about.

And where does it all end up? Why, the banks, of course. So how about they take a similar hit to everyone else? No repayments for three months with no interest added for them to gobble up later.

(In the same way that I'll have a haircut when the barber reopens, but I won't expect him to charge me for three haircuts to make up for the two I didn't have while he was shut.)

But the banks! How will they cope?!

Just like everyone else, I suspect. They could have furloughed some of their staff, shut down unneeded offices and, guess what, their rent bill can be cut too. Because their landlord won't owe any money to the bank for that period.

Instead, we make our sacrifice to the deity, just as we've always done. Something bad has happened but we must commit a painful act to the benefit of the god, or it won't get better. Or the god will get angry and things will get worse.

Future

Will a human of the future look back on this time with the same puzzled shrug as we look back on sacrifices in days of yore? Will they wonder why we inflicted these punishments on ourselves to placate an entity that doesn't really exist and wouldn't help us even if it did?

If you don't think Barnard Castle is a beautiful place to visit, you need your eyes tested

Welcome back, by the way. It's been two years and I've missed you. Three thought-ettes for you to consider and, if the mood takes you, to comment on.

Clap clap

People have been comparing NHS workers to superheroes. Even Banksy has got in on this game, drawing a child playing with a masked and caped nurse-doll, having thrown Batman and Spiderman in the bin.

But in what way are they comparable? And which superheroes?

Let's rule out Batman first. He's fabulously wealthy and has all the equipment he could possibly want or need, complete with a mask, albeit one that doesn't cover his nose or mouth. Iron Man is basically the same thing with a sense of humour - and a mask that does cover his nose and mouth. Superman is more or less indestructible and certainly wouldn't end up killed by a virus.

But the comparison to Ghostbusters is a much better fit. Ordinary people warning about a terrible threat, being ignored and undermined, building their own equipment to fight the threat, then facing the danger alone with no help from anyone else, other than a cheering crowd. (Were the crowd clapping? It's set in New York so probably more whooping and cheering than clapping.)


The twist being that the start of Ghostbusters 2 reveals that our heroes were sued by the city for not doing a better job (i.e. one involving less destruction) and had all the blame heaped on them for the considerable damage. Will that happen to health workers after the pandemic? Who can say...

Hedge

When there's a global pandemic, someone who runs a hedge fund will make a lot of money. And they appear on the news, looking just the way people expect hedge fund managers to look. And the opinion pieces imply (or state, or howl) that it's a disgrace that people are getting rich during the suffering.

But... if one fund goes up, it's only because another one went down. So who lost?

If it's another hedge fund, do you still care? I'm guessing probably not as much as you did. One hedge fund goes up by a billion, another goes down by a billion, that's just part of the game, right?

How about if it's your pension fund? (Or mine?) Bit more interesting now. And isn't the real story the one about the loser? About how that pension fund manager has managed to lose unspeakable sums. Why on earth was the pension fund on the duff side of the bet? For that matter, why were they even selling anything at a loss (or buying something at an inflated price)?

And how much management fee was collected by this hypothetical pension fund manager who has misjudged his gambling of your money (and mine?) and thereby handed part of your retirement to that smug bloke from the start of this story?

Nah - just concentrate on the guy who looks like he either just opened a bottle of champagne or is just about to.

Caps

The British government very kindly increased the benefits paid to some of the poorest in society to help them cope with the uncertainty of the global pandemic thingy.

Unfortunately, they have also instigated a 'benefit cap' - a maximum amount of money that anyone can receive. Which means some people don't, as it were, benefit from the increase because their income hits the cap. And, even worse, some of them then hypothetically go over a threshold with this money they're not receiving which means they have to start paying back a loan they got from (guess who?) the government so the increase makes them worse off.

Yes, really. The increase makes them worse off. These are some of the poorest in society.

The reporting of this state of affairs makes it sound like some terrible mistake but there appears to be no attempt to put it right. So presumably it was intentional. I mean, if it wasn't intentional, the government would fix it, right?

Maybe journalists are asking the wrong questions. Perhaps the real question is why does the government want to leave some people utterly destitute. Because they could fix it if they wanted to.

I don't have an answer to this one - except to repeat that if they didn't intend it, they would fix it.

First rule of change management is to realise that no matter how much modelling and testing you've carried out, reality will throw you a curveball that you didn't see coming. So you need a quick, simple and safe way to undo the change you just made. I don't see anyone undoing this one. Therefore it's not a mistake. Therefore it's intentional.

So why are they doing it? Answers on a postcard to Barnard Castle.